Analysts Finally Raise Dismal Profit Estimates

The good news is that Wall Street is raising its earnings estimates. The bad news is that the old estimates were for incredibly lousy earnings. Now, they’re just expecting somewhat lousy earnings. Still!

Wall Street firms raised forecasts on Standard & Poor’s 500 Index companies 896 times in June and lowered 886, according to data compiled by JPMorgan Chase & Co. The last time analysts were bullish on a net basis was in April 2007, before more than $1.5 trillion of bank losses tied to subprime loans spurred the first global recession since World War II, the data show.

The failure to anticipate Goldman Sachs Group Inc.’s record second-quarter profits or Freeport-McMoRan Copper & Gold Inc.’s tripling of bullion sales forced analysts to boost 2010 projections. Wall Street firms estimate the S&P 500 will earn $74.55 a share next year, up from $72.54 in May. Stocks now trade at 13.13 times estimated profit, indicating a 26 percent increase in the S&P 500 should the index return to its five-decade average of 16.54 times annual income.

Wall Street currently sees the S&P 500 earning $59.80 this year. So far, 75% of earnings reports have beaten expectations this earnings season. That’s on track to be a new record since they started keeping data in 1993.

Let’s look at Black & Decker’s (BDK) earnings because they serve as a microcosm for what we’re seeing this earnings season. BDK’s Q2 EPS plunged 60% to 63 cents. However, that came in well above Wall Street’s consensus of 37 cents a share.

What caused the earnings surprise? Cost-cutting. Lots of it. The company cut SGA (sales, general, and administrative costs) from nearly $400 million a year ago to $300 million. That’s pretty impressive. Obviously, one of easiest ways to cut overhead is to reduce your staff and that’s why the unemployment rate has steadily climbed higher.

Some people are quick to dismiss these earnings as somehow phony. They’re not. The earnings are real and the companies who cut costs should be rewarded. But there is room for skepticism because you can’t cut costs indefinitely. At some point, a business needs to expand to survive.

For their part, Black & Decker’s full-year EPS forecast was above the Street, even though the Q3 number was below consensus. (Call Transcript)